Loans-for-Gold Stumble as RBI Risk Aversion Kills Growth

India’s biggest lenders that use gold jewelry as collateral say earnings may stall this year as central bank regulation aimed at reducing risk in the banking system chokes off growth.

Net income at Muthoot Finance Ltd. may rise 10 percent in the year that started April 1 after surging an average 86 percent in the past five years, according to Managing Director George Alexander Muthoot. Profit at smaller rival Manappuram Finance Ltd. may be little changed, said I. Unnikrishnan, managing director at the Thrissur, India-based company.

“Our loan disbursements have come down” due to the regulatory changes, Unnikrishnan said in an interview yesterday. “We see flat asset growth this year.”

Muthoot and Manappuram are losing clients to money lenders after the Reserve Bank of India tightened rules to curb expansion at the finance companies and reduce risk at their creditors, mainly commercial banks. Manappuram, endorsed by Bollywood actor Akshay Kumar, will add no branches on a net basis this year while Muthoot will cut office openings by 75 percent. Manappuram has plunged 47 percent this year making it the worst performing stock in the BSE200 Index.

The Reserve Bank of India ordered gold financiers to raise Tier-1 capital to 12 percent by 2014 and cap loans at 60 percent of the value of the gold used as collateral, according to a statement from the regulator on March 21.

Bullion futures in India reached a record on June 19, while global spot prices for gold were down 15 percent from a peak. The metal, which surged 70 percent from the end of December 2008 to June 2011, is heading for its longest slump in a month.

Gold Stash

Business growth at these finance companies will decline “significantly” in the short-term, Crisil Ltd., the Indian unit of Standard & Poor’s said in a report on June 15. Sales growth may stabilize at a “sustainable” level of about 20 percent in the medium term, the rating company said.

Indians, the world’s largest buyers of bullion, have stashed 18,000 metric tons of gold in jewelry, coins and other forms, according to data on Manappuram’s website. That compares with 1,281.62 metric tons of gold held by the SPDR Gold Trust, the world’s biggest exchange-traded product backed by bullion.

Gold financiers including Manappuram, which started as a pawn broker in 1949, expanded as Indians started to unlock the value of their gold to benefit from growth in Asia’s third-largest economy and rising prices of the bullion. Finance companies in the organized sector hold 1,000 tons of gold, according to Muthoot.

‘New Concept’

Gold loans grew as it “was a new concept to Indians, who are known to sell gold only as a last resort,” Shashank Khade, senior vice president at Mumbai-based Kotak Portfolio Management, said on the phone. Demand for gold loans was also triggered by investors who used these loans to invest back in gold as it fetched them higher returns, he said.

The Reserve Bank set up a panel headed by K.U.B. Rao to analyze the implication of gold imports for financial stability, price trends and the role of non-bank finance companies in influencing rates. The panel is expected to submit its report by the end of July, the central bank said.

“All the uncertainty and speculations on whether there will be more regulations will be over in the next two months after the RBI comes out with its report on gold,” Manappuram’s Unnikrishnan said. Muthoot expects a “partial” relaxation of the rules within a year after the central bank “studies” the gold-loan business, he said.

Shares Drop

Manappuram surged 6.7 percent to 24.55 rupees, the highest since May 7 in Mumbai, while Muthoot, which has dropped 37 percent from its Aug. 11 record, rose 0.5 percent to 123.8 rupees. The BSE200 index has gained 13 percent this year outperforming the decline in both the companies.

Profit growth at Muthoot may slow to a 4 percent gain in the year ending March 31, according to a median survey of 7 analysts compiled by Bloomberg, while Manappuram’s net income may drop 3.9 percent to 5.68 billion rupees, according to a survey of 13 analysts.

“The assets are likely to fall in the first and second quarters,” Himanshu Kuriyal, an analyst at Mumbai-based Marwadi Share & Finance Ltd., said by phone. “Sequential growth may return from the third quarter as uncertainty over the regulations will subside.”

Muthoot, set up in 1939 in India’s Kerala state, charges as much as 24 percent for lending against bullion for 24 months, according to the company’s website. State Bank of India’s base rate is 10 percent.

The company, which is the main sponsor for the Indian Premier League’s Delhi Daredevils cricket team, plans to raise 15 billion rupees selling bonds this year to boost lending, Muthoot said. The firm may also sell shares when valuations become attractive, he said.

“There’s nothing wrong in the business model,” Muthoot said. “If I had money, I would have invested in the company now.”

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